Last Updated 10 Aug 2020

Efficiency productivity and financial intermediation

Category Bank, Mediation
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Economic resources are normally scarce in nature and therefore consumers will seek to maximize the utilization of these resources in order to gain maximum satisfaction. Efficiency tries to explain how consumers allocate the scarce resources to meet their needs. Types of efficiencies include static, which encompasses allocative and productive efficiencies. Static efficiency explains how much output can be produced currently from a given quantity of resources and if the producers charge a price that equates to the cost of factors of production used in the production of such service or good (Tutor2u, 2008).

Allocative efficiency is when the value attached by consumers is equal to the cost of resources used in the production process. In order to maximize the benefits achieved, the price charged should equal the marginal cost. Under allocative efficiency, no one party can benefit without the other party losing. Production efficiency on the other hand is the firm’s cost of production which can be used in the short and long run. Productive efficiency is attained when the firm produces at average cost at the lowest point.

This is where the company is exploiting the benefits of economies of scale (Tutor2u, 2008). Relationship between productivity and financial intermediaries Financial intermediaries can be banks, pension funds, building societies, credit unions, insurance companies, mutual funds etc. Financial intermediaries act as a link between the providers of capital and the users. In order to achieve efficiency and growth in productivity, financial intermediation has to be involved (Meon G P, 2006).

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Financial intermediaries affect the economic growth by minimizing the transaction and informational costs as well as coordinate the capital available to the most efficient use. Transaction costs are the costs incurred in doing business while informational costs are the costs of accessing the information that helps in decision making. By efficiently allocating the available capital, financial intermediation is able to determine the productivity of the other factors of production. Banks as one of the financial intermediary can provide information on possible investments.

This information could be on investment projects. Banks are able to reduce the cost of project appraisal before lending of capital thus enabling efficient allocation of capital (Meon G P, 2006). The other way in which financial intermediaries could promote efficiency and productivity by fostering technological innovations through the identification borrowers with good ideas that can succeed if funded hence minimizing chances of investing the much needed capital in unproductive ventures (Meon G P, 2006).

Financial intermediaries are also able to pressurize and monitor companies on how they utilize the capital provided to them and therefore encourage good corporate governance. Good corporate governance will in turn ensure that companies invest in prudent investments hence economic growth. The other important function of financial intermediaries is that of provision of an avenue where firms can accumulate savings at lower costs from different economic agents consequently leading to the reduction of information costs. The net result of this is better resource allocation hence economic development. Read about online enrollment system proposal

Apart from all other functions discussed above, financial intermediaries also facilitate easy exchange of goods and services through specialization. Easy and faster exchange of goods and services will definitely lead to economic growth (Meon G P, 2006). Conclusion It is apparent that the financial intermediaries cannot be separated from the allocation of resources in an efficient manner in order to achieve economic productivity. Financial intermediaries play an important role in fostering economic development as elaborated above.

Therefore to achieve efficient allocation of scarce resources to the most productive sectors of the economy hence achieve economic productivity.


Meon G P, W. L. (2006, October 10th). Does Financial Intermediation Matter for Macroeconomic Efficiency. Retrieved March 10th, 2009, from University of Brussels: http://dev. ulb. ac. be/dulbea/documents/1082. pdf Tutor2u. (2008, December 10th). Economic Efficiency. Retrieved March 18th, 2009, from Tutor2u: http://tutor2u. net/economics/content/topics/competition/efficiency. htm

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